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CubicFarm Systems Corp. Management Reports 2023
47769_rns_2023-05-02_e2389f1e-c364-47ce-aa26-e188e8d251ec.pdf
Management Reports
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Management's Discussion and Analysis
For the years ended December 31, 2022 and 2021
Dated: May 2, 2023
The following Management's Discussion and Analysis ("MD&A") is prepared as of May 2, 2023, and reports on the operating results and financial condition of CubicFarm Systems Corp., (the "Company" or "CubicFarms") for the year ended December 31, 2022. This MD&A is prepared by management and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2022, as well as the consolidated financial statements for the year ended December 31, 2021, which have been prepared in accordance with International Financial Reporting Standards ("IFRS"). All dollar amounts herein are expressed in Canadian dollars unless stated otherwise.
In this discussion, unless otherwise indicated, a reference to the business and operations of the Company includes the business and operations of CubicFarm Systems Corp. and its wholly owned subsidiaries: CubicFarm Manufacturing Corp., CubicFarm Produce (Canada) Corp., CubicFarm Systems U.S. Corp., HydroGreen, Inc. ("HydroGreen"), and CubicFarm Systems (Shanghai) Corp.
The Company's most recent annual information form and other documents and information have been filed electronically through the System for Electronic Document Analysis and Retrieval ("SEDAR") and are available under the Company's profile at www.sedar.com.
Forward-Looking Statements
Certain statements contained in the following MD&A constitute forward-looking statements. These statements are based on the beliefs of management as well as assumptions made by and information currently available to the Company. When used in this document, the words "plans", "forecasts", "budgets", "anticipate", "believe", "estimate", "expect" and similar expressions, as they relate to the Company or management, are intended to identify forwardlooking statements. Such forward-looking statements include but are not limited to statements related to the Company's ability to: raise sufficient capital to meet its obligations as and when they come due, meet its commitments, continue operations and realize its assets and discharge its liabilities in the normal course of business, enter into sales agreements with new customers, secure incremental cashflow, and secure debt and equity financing and achieve profitable operations. These forward-looking statements involve a number of known and unknown risks, uncertainties and other factors including, but not limited to, financial, operational, environmental and political risks, general equity and market conditions. The outcome of these factors may cause the actual results and performance of the Company to be materially different from any plans or results expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. The Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, however, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. The Company provides no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Forward looking information will not be updated unless required by law or securities regulations. For a comprehensive list of the risks and uncertainties applicable to the Company, refer to pages 1-3, and 39-49 of the Company's annual information form available at www.sedar.com.
About the Company and Nature of Business
The Company was incorporated under the Business Corporations Act of British Columbia on October 8, 2015. The Company is domiciled in Canada and its principal address is 7170 Glover Road, Langley, BC, V2Y 0W9.
The Company listed its common shares on the Toronto Stock Exchange Venture Exchange ("TSXV") as a Tier 1 issuer in July 2019. On September 1, 2021, the Company graduated to Toronto Stock Exchange ("TSX") and commenced trading under the symbol "CUB."
CubicFarms is a local chain agricultural technology company that provides unique automated on site commercialscale food and livestock feed technologies. CubicFarms' technologies localize food production and convert wasteful long supply chains within the agriculture industry into a more local supply chain. This improves the consumer's access to quality food and maximizes crop yield, all while reducing the environmental footprint of food and feed production. These technologies can provide independent and efficient fresh produce and livestock feed supply in any climate, 365 days a year.
The Company operates in two segments, which are its Feed Division and Fresh Division. The Feed Division (selling hydroponic equipment and services to promote live green animal feed production in a controlled environment) and Fresh Division (selling hydroponic equipment and services to promote leafy green production in a controlled environment) use two distinct technologies that address two distinct markets.
Feed Division
The Company's Feed Division operates using the Company's HydroGreen technology for growing nutritious livestock feed. The HydroGreen Grow System technology was acquired by the Company along with the acquisition of HydroGreen Inc. on January 2, 2020. Since the acquisition, CubicFarms has improved upon the original HydroGreen technology and has commercialized two Automated Vertical Pastures™, the DG66 (designed for small family farms of 100 to 500 animals) and the GLS808 (designed for larger commercial farms of 500 to 15,000+ animals).
This system utilizes a unique process to sprout grains, such as barley and wheat, in a controlled environment with minimal use of land, labour, or water. Automated Vertical Pastures™ is fully automated and performs all growing functions including seeding, watering, lighting, harvesting, and re-seeding – all with the push of a button – to deliver nutritious livestock feed without the typical investment in land, fertilizer, chemicals, fuel, field equipment and transportation. Automated Vertical Pastures™ not only provides superior nutritious feed to benefit the animal, but also enables significant environmental benefits to the farm with reduced use of land, reduced use of water, and a reduction in harmful methane emissions.
As of December 31, 2022, the Feed Division had 31 employees and full-time contractors, a decrease of 26% from 39 as of December 31, 2021.
Manufacturing
HydroGreen products are manufactured at a 21,620 square foot warehouse and office space at HydroGreen's principal place of business located in Sioux Falls, South Dakota.
Research and Development
HydroGreen has developed a 12,000 square foot HydroGreen Innovation Center located in Sioux Falls, South Dakota. The HydroGreen Innovation Center currently contains three Automated Vertical Pastures™ and is used for research and development, product testing, customer visits, partner training, and feed trials. The Company has been carrying out additional research and development activities on several of its beta project customer sites.
Fresh Division
The Company's Fresh Division operates using the patented CubicFarm™ System, which contains CubicFarms' patented technology for growing leafy greens and other crops. The CubicFarm System modules address two of the most difficult challenges in the vertical farming industry, being high electricity and labour costs, using unique undulating path technology. CubicFarms' patented Crop Motion Technology™ moves plants to one layer of LED grow lights, unlike typical rack and stack layouts of other vertical farms that use multiple layers of energy-intensive LEDs.
The Company's Fresh Division previously sold small-scale, containerized systems directly to farmers but the lack of scale and the level of selling, general, and administrative expenses ("SG&A") required made that business model for the Fresh Division unprofitable. Subsequently, CubicFarms scaled down its Fresh Division to focus on large systems ("FreshHubs") to compete with field-grown lettuce.
The Company's high-density FreshHub system occupies one acre of land and the Company believes the system can replace up to 100 acres of outdoor field growing. FreshHub systems can be located near major population centres for closer access to more reliable, year-round growing indoors with the added flexibility of less land, less water, localized transportation, and significant energy savings.
As of December 31, 2022, the Fresh division had 38 employees and full-time contractors, a decrease of 68% from 120 as of December 31, 2021.
Research and Development
CubicFarms operated R&D facilities in Pitt Meadows, British Columbia, and in Busby, Alberta. These facilities were used for plant science R&D, development of farm operating protocols, and both hardware and software testing. The Company has exited both of these facilities to bring all research and development activities into Langley, BC.
Corporate and operational highlights for the year ended December 31, 2022
On January 12, 2022, the Company announced that Real Leaders® has named CubicFarms as one of the newly selected winners of its 2022 Top Impact Companies from around the world. The 2022 list features a mix of respected impact brands of all sizes and from a variety of industries.
On January 12, 2022, the Company announced the appointment of G. David Cole to the Company's Board of Directors. Cole is recognized internationally as an accomplished senior financial executive with nearly 40 years of corporate experience in building teams and businesses in a broad range of global markets and economies. As Vice Chairman of the Enterprise Strategic Client Group at Royal Bank of Canada, Cole has extensive expertise in strategic business growth, capital markets, financial products and client-centric sales and marketing. Known for his strong client focus, high energy level, creativity, demonstrated adaptability, and leadership skills, Cole is a highly respected senior executive, a member of the Institute of Corporate Directors, and a member of multiple boards.
On February 7, 2022, the Company announced the appointment of Tom Wiltrout to the Company's HydroGreen Business Advisory Board. Wiltrout provides business consulting services for input agriculture and the global seeds industry in his role as President of Thirty Thirty, LLC. He is a senior executive at world-leading agriculture investor group Ospraie Ag Science, LLC, a strategic shareholder in the Company with approximately 16.6% ownership of CubicFarms.
On February 15, 2022, the Company announced a new Nebraska-based HydroGreen Certified Dealer, Central Confinement Service LLC ("CCS"), with initial sales commitments for 12 HydroGreen indoor growing systems to be delivered in 2022 valued at $2.25 million. CCS is a leading designer and builder of turn-key livestock and agriculture facilities with more than 35 years of experience providing quality construction and custom-built equipment to livestock producers.
On March 7, 2022, the Company announced a sales agreement for 27 CubicFarm System modules in Winnipeg, Manitoba, at a sale price of $5.13 million. Experienced greenhouse farmers Sheldon and Carrie Enns operate the Green Valley Garden Centre, supplying high-quality vegetables and ornamental plants in Southeastern Manitoba for the past 12 years. The Enns will use the CubicFarm Systems automated indoor growing technology to grow commercial scale amounts of leafy greens, herbs, and microgreens in the Winnipeg area for the surrounding communities.
On March 10, 2022, the Company announced the appointment of Daniel Burns, a member of the Company's Board of Directors, as interim Chief Financial Officer ("CFO"). He will step down as Chair of the Company's Audit Committee to serve as interim CFO, effective April 1, 2022. Burns replaces Tim Fernback, who stepped down from his role as CFO but will continue as a Company advisor while overseeing several strategic projects over the next several months. In addition, Fernback will continue serving as an active member of the Company's Scientific Advisory Board.
On March 11, 2022, the Company announced that South by Southwest® ("SXSW") recognized the Company's HydroGreen Automated Vertical Pastures™ as one of five finalists in the "New Economy" category of the 2022 SXSW Innovation Awards.
On March 25, 2022, the Company announced the appointment of Edoardo De Martin as President of CubicFarms, in addition to his role as Chief Technology Officer of the Company. A proven leader with over 20 years in the tech industry, in the last 12 months in his role as Chief Technology Officer at CubicFarms, De Martin has transformed the Company's technology and leveled up the skills, strategy, and offerings with the development of the Company's enterprise level platform. Since joining CubicFarms, De Martin has strengthened the Company's roadmap, built a
new software division and assembled a world-class product and technology team to deliver the next generation of indoor growing technologies.
On April 1, 2022, the Company announced Mountainland Supply Company ("Mountainland") as a new member of the HydroGreen Certified Dealer Network. Established in 1947 with 29 distribution branches, Mountainland has an agriculture division specializing in irrigation services for farmer and rancher customers in Utah, Wyoming, and Idaho.
On April 27, 2022, the Company announced the appointment of Carlos Yam as CFO of the Company, effective June 27, 2022. With over 15 years of senior finance executive experience, Yam has served as CFO of both publicly traded and private companies with responsibilities ranging from strategic growth, capital markets, mergers and acquisitions, business integration, risk management, banking and treasury, to financial reporting and analysis and operational finance.
On May 12, 2022, the Company announced data that demonstrates 54% to 62% less energy is used in a CubicFarm System module compared to results reported by other vertical farms surveyed globally. With electricity being the number one input cost in vertical farming, this isa significant advantage to customers using the CubicFarm System technology for indoor growing. The Company initiated new data collection to effectively measure energy usage in the CubicFarm System. Patented Crop Motion Technology™ moves plants to one layer of LED grow lights, unlike typical rack and stack layouts of other vertical farms that use multiple layers of energy-intensive LEDs.
On May 17, 2022, the Company announced that its HydroGreen division has entered into an agreement with Deloitte LLP to develop a carbon commercialization program designed to provide high-quality carbon credits to a fastgrowing global market. HydroGreen's commercial scale Automated Vertical Pastures™ technology helps meet increasing demand for valuable farm-based inset and offset carbon credits from all manner of organizations with net-zero goals. HydroGreen will be uniquely positioned to supply carbon credits through the Company's agreement with Deloitte.
On June 2, 2022, the Company announced the closing of its overnight marketed public offering of unsecured convertible debenture units (the "Debenture Units") of the company at a price of $1,000 per Debenture Unit for total gross proceeds of $6,540,000, and 7,361,000 common shares (the "Common Shares") of the Company at a price of $0.55 per Common Share for total gross proceeds of $4,048,550. In aggregate, total gross proceeds were $10,588,550, which is inclusive of the partial exercise of the overallotment option.
On June 14, 2022, the Company announced a 10-machine Automated Vertical Pastures™ sale to the Cnossen Dairy located in Hereford, West Texas, which currently milks 11,000 cows over 7,500 acres of farmland. In addition, Dairy Specialists, Advanced Dairy Systems and Penner Farm Services joined the HydroGreen Certified Dealer Network.
On June 28, 2022, the Company announced that it has entered into agreements with NTE Discovery Park Ltd. ("NTE Discovery Park") for the purchase of 26 CubicFarm System modules, the manufacturing of those initial 26 modules, as well as the future manufacturing of major components for contracts within North America. The initial 26 modules will be installed at Discovery Park in Campbell River, B.C., with the intention to expand with the sale and manufacturing of an additional 100 modules.
On August 15, 2022, the Company announced a comprehensive review of its internal cost structure to optimize operating efficiency and accelerate its path to profitability. The Company provided notice to approximately 16.5% of its workforce and reduced other non-payroll related overhead expenditures.
On September 9, 2022, the Company announced management and strategic transitions. Dave Dinesen and Jeff Booth both resigned from the Board of Directors, and Daniel Burns was appointed Chair of the Board. Edoardo De
Martin was also appointed Interim Chief Executive Officer following the retirement of Dave Dinesen. Additionally, a Special Committee comprising independent Board directors was appointed to review strategic and tactical opportunities for the Company.
On September 12, 2022, the Company announced additional cost reduction measures to optimize operating efficiency and accelerate its path to profitability. These measures included reducing payroll related expenses by $6.4 million annually and non-payroll related expenses by $2.6 million annually. Combined with previously announced cost reduction measures on August 15, 2022, the Company provided notice to 87 employees or 50.4% of its workforce.
On September 20, 2022, the Company announced that it completed the closing of a $6.4 million secured revolving term loan to support the business operations (the "Term Loan"). The Term Loan has a term of two years, subject to prepayment obligations upon the Company achieving certain milestones or disposing of assets outside of the ordinary course of business and bears and pays interest at a rate of 10.0% per annum. The lender of the Term Loan also received share purchase warrants (the "Warrants") in HydroGreen, Inc. ("HGI"), to purchase, in aggregate, approximately 4.8 million of HGI shares.
On October 24, 2022, the Company announced key leadership changes and appointed John de Jonge as Interim Chief Executive Officer of CubicFarms and President of HydroGreen following the departure of prior Interim Chief Executive Officer Edoardo De Martin at CubicFarms and of former President Dan Schmidt at HydroGreen.
On November 23, 2022, the Company announced its Feed division has entered into a wholesale program and support agreement with DLL Finance LLC ("DLL") to provide floor plan financing for the sales of Automated Vertical Pastures™ to HydroGreen's dealership network. DLL is a division of Rabobank Group, a European-based international financial services provider specializing in the food and agriculture industries. The Company also announced that Leo Benne, Head of Innovation and member of the Board of Directors, has resigned from his roles.
On December 19, 2022, the Company announced that it has completed the closing of offering of units (each, a "Unit") by issuing a total of 21,428,570 Units at a price of CAD$0.063 per Unit for the gross proceeds of USD$1 million (the "Offering"), pursuant to the listed issuer financing exemption under Part 5A of National Instrument NI 45-106 – Prospectus Exemptions.
Each Unit is comprised of one common share ("Common Share") in the capital of the Company and one Common Share purchase warrant ("Warrant") of the Company. Each Warrant shall entitle the holder thereof to acquire one additional Common Share at a price of $0.078 for a period of two (2) years from the closing date of the Offering.
Environmental, Social, and Governance (ESG)
Beyond selling products that directly and positively impact climate change and improving the use of land and water resources, by localizing food and livestock feed production, the Company and its products promote food security and food equality globally.
More specifically, the use of CubicFarms technology developed within the Fresh Division contributes to the United Nations' Sustainable Development Goals through the following:
- x 95% less fresh water than traditional farming
- x Crop Motion TechnologyTM innovation uses a single row of light to reduce energy consumption
- x Shortened supply chain needs by growing local, resulting in 80% less waste
- x Zero pesticides or herbicides used
- x Significantly less land required to grow the same amount of food
- x 45% more nutrients found within produce grown locally compared to produce transported via long supply chains
Similarly, the use of the HydroGreen technology within the Feed Division contributes to the United Nations' Sustainable Development Goals through the following:
- x 95% less fresh water than traditional farming
- x Seed to feed in 6 days, grown on-site, reducing long supply chains and feed transport
- x Feed is highly nutritional, full of vitamins, antioxidants, and digestive enzymes
- x Zero pesticides or fertilizer used
- x Significantly less land required to grow the same amount of animal feed
- x 7.4% fewer greenhouse gas emissions using hydroponic technology
CubicFarms ESG Disclosure
CubicFarms business is intertwined with environment, social and governance matters. The Company is making an active effort to deliver sustainable benefits to society needed for the long term. The Company is combining cost benefits with a positive effect on the environment in order to create shareholder value and attempt to make the world a better place.
The Company's technologies help significantly reduce the amount of fresh water, land and energy used by farmers. It's not just using fewer natural resources, it's also eliminating the need for pesticides, herbicides, or fertilizer. With every installation and expansion of the company indoor growing systems, farmers are using innovative technologies.
Environmental Commitments
Sustainability
CubicFarms and HydroGreen have endorsed the "Decade of Ag" movement, the first-ever sector-specific vision for the sustainable food systems of the future. The Company's endorsement is a pledge to work with leaders and organizations and work toward a resilient, restorative, economically viable, and climate-smart agricultural system that produces abundant nutritious food and livestock feed.
Social Commitments
The Company is committed to the health and safety of our employees, customers, vendors, and community. The Company is attracting and retaining world-class talent and passionate individuals who believe in the Company mission and thrive in the workplace, in the office or on the farm.
The Company's CubicFarms Community Giving program organizes priority giving initiatives specifically chosen to align with the company ESG priorities, like improving food insecurity by dedicated fundraising programs for social food banks and participating as a team for the World Vision "Global 6K for Water" challenge.
Local communities using CubicFarms' technologies for indoor automated growing are experiencing more sustainable access to fresh food and livestock and are using natural resources more sustainably.
Animal Welfare
At CubicFarms, the Company is concerned about animal welfare and uses both animal and plant science knowledge to create technologies that support animal health and wellbeing. The Company R&D team is conducting research and data collection on dairy cattle consuming HydroGreen fresh livestock feed as part of the herd's ration. Preliminary results on a sample of dairy cattle are showing impressive health improvements for close up cows and calves, that showed much better health during weaning and through the entire feeding period, compared to a sample of non-HydroGreen calves. The nutritious fresh livestock feed grown in HydroGreen Automated Vertical Pastures™ contains high quality protein in the form of amino acids and simple peptides. This results in high quality energy in the form of simple sugars and starches within the feed ration, with readily available nutrients that appear critical for health, growth, production, and reproduction. The feed palatability, as well as the higher moisture of the HydroGreen fresh feed, improves ration conditioning with less sorting of ingredients by the animals, resulting in a lower incidence of upper respiratory issues due to dust inhalation. Fresh livestock feed is both nutritious and devoid of anti-nutritional factors, such as haemagglutinins, trypsin inhibitors, tannins and pentosans, and phytic acid.
Governance Commitments
The Company is committed to open and transparent communications with all stakeholders. The CubicFarms team strives for clarity without unnecessary complexity in the Company's news and financial statements, avoiding unnecessary jargon for maximum understanding of the Company's messages.
CubicFarms is committed to disseminating all material information that would reasonably be required to make an informed decision about investment in or trading securities of the company (TSX: CUB) in a fair, timely, and costefficient manner. Material information is available on the company's website Investors page with a link to all associated documents.
The Company is advised with governance and oversight by the Corporate Governance Committee on the CubicFarms Board of Directors which is composed solely of experienced and independent member Directors. Furthermore, the Corporate Governance Committee has a general mandate to assess all issues that may affect the Company in the areas of corporate governance and to recommend appropriate governance policies to the Board.
Among other advantages, the Company's focus on ESG provides CubicFarms with opportunities to tap into new markets and expand into existing ones while attracting top talent to our goal of transforming agriculture globally.
Highlights subsequent to the year ended December 31, 2022
On March 17, 2023, the Company announced that it has closed its previously announced overnight marketed public offering (the "Offering") of units (the "Units") of the Company. Each Unit consists of one common share of the Company (a "Common Share") and one common share purchase warrant (the "Warrant"). Each Warrant entitles the holder thereof to acquire one Common Share of the Company at an exercise price of C$0.10 (the "Exercise Price") per Common Share for a period of 36 months from March 17, 2023 (the "Closing Date").
Pursuant to the Offering, the Company issued a total of 56,027,000 Units at a price of C$0.05 per Unit (the "Offering Price") for gross proceeds of C$2,801,350, including 10,261,000 Units issued to reduce working capital obligations of the Company for C$513,050 in payables ("Debt-for-Equity Swap"). In addition, the Company has agreed to pay a cash commission equal up to 6% of the aggregate gross proceeds of the Offering, including the amounts raised in the Debt-for-Equity Swap. As an additional compensation, the Company issued 3,061,620 of non-transferable compensation warrants (the "Compensation Warrants"). Each Compensation Warrant will be exercisable to acquire one Common Share of the Company at the Offering Price for a period of 36 months from the Closing Date, subject to adjustment in certain events.
Discussion of Operations
Three and twelve months ended December 31, 2022, and 2021
| Revenue | |||||||
|---|---|---|---|---|---|---|---|
| Fresh Division | December 31, 2022 | December 31, 2021 | Change | % | |||
| Three months ended | $ | 118,572 | $ | (657,797) | $ | 776,369 | n.a. |
| Twelve months ended | $ | 3,331,866 | $ | 3,611,093 | $ | (279,227) | -8% |
| Feed Division | December 31, 2022 | December 31, 2021 | Change | % | |||
| Three months ended | $ | 57,348 | $ | 1,476,992 | $ | (1,419,644) | -96% |
| Twelve months ended | $ | 303,939 | $ | 1,662,073 | $ | (1,358,134) | -82% |
| Total | December 31, 2022 | December 31, 2021 | Change | % | |||
| Three months ended | $ | 175,920 | $ | 819,195 | $ | (643,275) | -79% |
| Twelve months ended | $ | 3,635,805 | $ | 5,273,166 | $ | (1,637,361) | -31% |
The Company's sales fluctuate on a quarter-by-quarter basis, leading to financial results fluctuating from period to period. The Company has three main sources of revenue – sales of indoor growing technologies, services, and consumables. Consumables include produce sales, parts, seeds, nutrients, fertilizers, and substrates, and services include customer support subscriptions and consulting.
Sales within the Fresh Division for the three months ended December 31, 2022, included supply of parts of $67,576, and consumable revenue of $50,996. Sales within the Fresh Division for the year ended December 31, 2022, included system sales of $2.6 million, consumable revenue of $583,268 and services revenue of $101,467. Sales within the Feed division for the three months ended December 31, 2022, included part sales of $57,348. Sales within the Feed Division for the year ended December 31, 2022, included system sales of $303,939.
For the year ended December 31, 2022, sales within the Fresh division decreased by 8%, primarily due to lower system sales as fewer projects were completed and commissioned compared to the prior year. Systems sales were $2.6 million in FY2022 versus $3.1 million in FY2021. The decrease was partially offset by higher consumable revenues, which was $0.6 million in FY2022 versus $0.3 million in FY2021. For the year ended December 31, 2022, sales within the Feed division decreased by 31%. This decrease is due to lower system sales.
| % | |||||
|---|---|---|---|---|---|
| (6,547,221) | $ | (937,512) | $ | (5,609,709) | -598% |
| (6,386,738) | $ | (293,652) | $ | (6,093,086) | -2075% |
| December 31, 2022 | December 31, 2021 | Change | % | ||
| (145,724) | $ | 325,696 | $ | (471,420) | n.a. |
| (75,233) | $ | 302,946 | $ | (378,179) | n.a. |
| December 31, 2022 | December 31, 2021 | Change | % | ||
| (6,692,945) | $ | (611,816) | $ | (6,081,129) | -994% |
| (6,461,971) | $ | 9,294 | $ | (6,471,265) | n.a. |
| December 31, 2022$$$$$$ | December 31, 2021 | Change |
Gross margin
CubicFarm Systems Corp. Management's Discussion and Analysis For the years ended December 31, 2022 and 2021
Gross margin for the three months ended December 31, 2022, was $(6,692,945). Gross margin for the twelve months ended December 31, 2022, was $(6,461,971). In addition to the regular course of business for cost of sales, the Company incurred approximately $102,727 in inventory obsolescence, $367,533 to retrofitting, $2,660,483 write down in deposits for inventory, and $3,427,517 of inventory write down for the twelve months ended December 31, 2022. The write downs are a result of management's assessment of inventory deemed as excess inventory based on current and projected market demands.
Gross margin for the three months ended December 31, 2021, was $(611,816). The Company continues to invest in retrofitting certain existing customer equipment to the newest version of the equipment available, and while improving the throughput, reliability, and capabilities, it negatively affects the Company's gross margins. The Company made this decision to ensure these customers achieve the highest possible productivity and efficiency from its systems. The Company incurred approximately $744,000 related to retrofitting during the three months ended December 31, 2021. The Company also wrote down $207,334 of inventory due to engineering changes.
Gross margin for the twelve months ended December 31, 2021, was $9,294 or 0.2% of revenue. The Company incurred approximately $1.31 million related to retrofitting, and $207,334 of inventory write downs for the twelve months ended December 31, 2021.
General and administrative expenses
| December 31, 2022 | December 31, 2021 | Change | % | |
|---|---|---|---|---|
| Three months ended | $3,078,954 | $5,145,416 | $(2,066,462) | -40% |
| Twelve months ended | $15,203,156 | $16,644,987 | $(1,441,831) | -9% |
The decrease in general and administrative expenses is in line with the Company's cost reduction plan to optimize operating efficiency. For the three months ended December 31, 2022, general and administrative expenses were reduced by $2.07 million or 40%. The reduction was primarily due to reduced headcount and related operating expenses as a result of the cost reduction plan. General and administrative staffing expense and consulting fees for the three months ended December 31, 2022, was $2,407,160 (compared to $4,061,244 for the three months ended December 31, 2021).
For the twelve months ended December 31, 2022, general and administrative expenses decreased by $1.44 million or 9%. This decrease was due mostly to a decrease in staffing, office expenses and supplies, subscriptions, software licenses, shipping and logistics costs, and operational supplies.
Selling expenses
| December 31, 2022 | December 31, 2021 | Change | % | |
|---|---|---|---|---|
| Three months ended | $808,077 | $1,981,118 | $(1,173,041) | -59% |
| Twelve months ended | $6,022,487 | $6,307,982 | $(285,495) | -5% |
For the three months ended December 31, 2022, selling expenses decreased by $1.17 million or 59%. This was due to a decrease in staffing and consulting fees of $608,994, as well as marketing and promotions of $451,463.
For the twelve months ended December 31, 2022, selling expenses decreased by $285,495 or 5%. This was due to the cost reduction measures were implemented in the last half of the year and to continue into the subsequent periods.
Research and development
| December 31, 2022 | December 31, 2021 | Change | % | |
|---|---|---|---|---|
| Three months ended | $1,831,170 | $3,232,038 | $(1,400,868) | -43% |
| Twelve months ended | $10,410,196 | $7,518,489 | $2,891,707 | 38% |
For the three months ended December 31, 2022, research and development expenses decreased by approximately $1.40 million or 43%. This was mostly due to a decrease in headcount and consulting fees implemented in the second half of 2022, and the Company's overall approach to refocusing on the Feed division, which required a lower activity level with R&D.
For the twelve months ended December 31, 2022, research and development expenses increased by $2.89 million or 38%. This was mostly due to an increase in R&D staffing expenses and consulting fees, and an increase in office expenses and supplies, subscriptions, software licenses, shipping and logistics costs, and operational supplies in the first half of the year.
Impairment loss
| December 31, 2022 | December 31, 2021 | Change | % | |
|---|---|---|---|---|
| Three months ended | $16,991,153 | $- | $16,991,153 | n.a. |
| Twelve months ended | $20,447,236 | $- | $20,447,236 | n.a. |
During the three and twelve months ended December 31, 2022, the Company assessed indicators for impairment and concluded that indicators of impairment exist which resulted in testing for impairment in the period. The Company has identified two Cash Generating Units (CGU's), which are the Fresh division and the Feed division.
In the twelve months ended December 31, 2022, the Fresh division was impaired by $4,053,527 and the Feed division was impaired by $16,393,709. The impairment loss was allocated to property, plant and equipment, intangible assets, right of use assets, and goodwill.
Net finance expense (income)
| December 31, 2022 | December 31, 2021 | Change | % | |
|---|---|---|---|---|
| Three months ended | $665,697 | $152,838 | $512,859 | 336% |
| Twelve months ended | $1,592,591 | $(8,211) | $1,600,802 | n.a. |
The net finance expense relates to finance expenses and accretion charges incurred in the period. The net finance expense in the three and twelve months ended December 31, 2022, also included the interest on the convertible debentures issued in the second quarter, interest on the senior term loan issued in the third quarter, and a loss on debt modification. The twelve months ended December 31, 2021, included a gain on debt modification of $497,287.
Net loss
| December 31, 2022 | December 31, 2021 | Change | % | |
|---|---|---|---|---|
| Three months ended | $(29,842,639) | $(11,243,309) | $(18,599,330) | -165% |
| Twelve months ended | $(60,370,289) | $(29,357,383) | $(31,012,906) | -106% |
The Company's net loss in the three and twelve months ended December 31, 2022, reflects the Company's prior expansion of its business and staffing additions that were necessary to both develop and sell its manufactured products within the global controlled-environment agricultural market. Cost reduction measures were put in place in the third quarter. The net loss also reflects the impairment loss recognized in the period.
Use of Proceeds
The following table provides a comparison between the expected and actual use of proceeds from the Company's financing activities as of December 31, 2022:
| Month | ExpectedAmount perProspectus | ActualAmountReceived | Use of Proceeds | Expected | % | Actual | % |
|---|---|---|---|---|---|---|---|
| Nov-21 | $18,550,000 | $18,550,000 | Sales and marketing | $7,420,000 | 40.0% | $2,978,662 | 16.1% |
| R&D | $9,275,000 | 50.0% | $4,477,816 | 24.1% | |||
| Working capital and generalcorporate purposes | $1,855,000 | 10.0% | $11,093,522 | 59.8% | |||
| Jun-22 | $10,560,000 | $10,588,550 | Sales and marketing | $1,056,000 | 5.7% | $1,579,609 | 15.0% |
| R&D | $6,336,000 | 34.2% | $2,824,938 | 26.8% | |||
| Working capital and generalcorporate purposes | $3,168,000 | 17.1% | $6,184,003 | 58.6% | |||
| Sep-22 | $6,400,000 | $6,400,000 | Working capital and generalcorporate purposes | $6,400,000 | 100.0% | $4,805,076 | 75.1% |
| Dec-22 | $1,350,000 | $1,350,000 | Working capital and generalcorporate purposes | $1,350,000 | 100.0% | $- | 0.0% |
The execution of the operations of the Company requires management to constantly re-evaluate the planned use of funds between working capital, research & development, and marketing expenses.
Summary of Quarterly Results
The financial results for each of the eight most recently completed quarters are summarized below, prepared in accordance with IFRS:
| Period | Revenue | Net income (loss) forthe period | Basic and fully dilutedincome (loss) per share |
|---|---|---|---|
| $ | $ | $ | |
| January 1, 2021 - March 31, 2021 | 3,906,810 | (3,677,088) | (0.03) |
| April 1, 2021 - June 30, 2021 | 356,005 | (6,472,041) | (0.04) |
| July 1, 2021 - September 30, 2021 | 191,156 | (7,964,945) | (0.05) |
| October 1, 2021 - December 31, 2021 | 819,195 | (11,243,309) | (0.07) |
| January 1, 2022 - March 31, 2022 | 243,912 | (8,760,249) | (0.05) |
| April 1, 2022 - June 30, 2022 | 2,890,493 | (9,091,846) | (0.05) |
| July 1, 2022 - September 30, 2022 | 325,480 | (12,675,555) | (0.06) |
| September 01, 2022 - December 31, 2022 | 175,920 | (29,842,639) | (0.16) |
There is no established seasonality trend at this stage of the Company's development. Revenue from the sale of goods is recognized when the Company transfers the risk and control to the customer, which generally occurs upon delivery or transfer of title. Revenue from services is recognized when the related service is provided, and completion sign off is obtained from the customer. License and subscription revenue is recognized over the period covered by the license or subscription.
In addition, there are factors beyond the Company's control, such as the customer's ability to secure permitting, complete site preparations, ocean freight/shipping delays, COVID-19-related delays, as well as weather and other transportation delays, which could affect the timing of the delivery of the modules.
During the three months ended December 31, 2022, the Company's revenues were primarily derived from consumables sales.
Liquidity and Capital Resources
As at December 31, 2022, current assets less current liabilities was negative $1,928,674 compared to positive $25,567,298 as at December 31, 2021. The decrease is primarily due to a reduction of cash, impairment charges on current assets, as well as an increase in trade and other payables, customer deposits, and loan and borrowings.
Operating Activities
Cash outflow from operating activities for the three months ended December 31, 2022, was $4,068,743, a decrease in cash outflow by 57% compared to $9,534,173 in the prior year. The cost reduction measures implemented commenced in the third quarter 2022.
Cash outflow from operating activities for the twelve months ended December 31, 2022, was $28,006,434, which is a decrease of 8% compared to $30,467,205 in the prior year. The decrease in cash outflow was due to the cost reduction measures in the third quarter of 2022 and higher customer deposits received.
Investing Activities
Cash outflow from investing activities for the twelve months ended December 31, 2022, was $5,207,975, a decrease of 33% compared to $7,810,370 in the prior year. The decrease in cash outflow was primarily due to lower property, plant and equipment and intangible asset investments compared to the prior year.
Financing Activities
Cash inflow from financing activities was $14,789,703, a decrease of 66% compared to $43,534,829 in the prior year. The decrease was due to less equity financing.
Contractual Amounts Payable
As at December 31, 2022, the Company has financial liabilities which are due on a fiscal year basis as follows:
| As at December 31, 2022 | Carrying Amount | < 1 Year | 1-5 years | 5+ Years | Total |
|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | |
| Trade and other payables | 7,514,621 | 7,514,621 | - | - | 7,514,621 |
| Earn out payable | 1,696,063 | 1,696,063 | - | - | 1,696,063 |
| Lease liabilities | 2,959,168 | 933,498 | 1,869,722 | 1,000,320 | 3,803,540 |
| Loans liabilities | 10,707,631 | 3,121,127 | 15,484,775 | - | 18,605,902 |
| Total | 22,877,483 | 13,265,309 | 17,354,497 | 1,000,320 | 31,620,126 |
Capital Management
To date, the Company has financed its operations primarily through issuances of debt and equity. The development of modular growing systems and animal feed systems as well as its production process involves significant financial risks, including the ability of the Company to develop and penetrate new markets, obtain additional financing as required, achieve profitable production, and the ability for the Company to be able to successfully assert its intellectual property rights and protect against patent infringement.
The losses and deficits incurred by the Company indicate a material uncertainty that may cast significant doubt about the Company's ability to continue as a going concern. As of December 31, 2022, the Company had cash and cash equivalents of $2,944,924. Although reduced in recent months as a result of the Company's implementation of cost reduction measures, the Company continues to maintain a certain level of non-discretionary monthly expenditures. Combined with slower-than-expected product sales, this results in a reduction in the Company's cash position and short-term liquidity. As of the date of this MD&A, the Company had cash on hand and credit room from its existing credit facilities, provided certain draw conditions are met, totaling approximately $2.7 million. The Company expects incremental cash inflow and thus improve its cash position upon signing of sale agreements with new customers through receipt of progress payments as they arise. The Company is also seeking other strategic options in order to extend its cash runway. There is no guarantee that the Company will be able to raise sufficient capital to extend its cash runway or on terms that will not be detrimental to its current shareholders. These conditions cast significant doubt on the Company's ability to continue as a going concern. The Company's consolidated financial statements do not give effect to adjustments that would be necessary should the Company be unable to continue as a going concern and therefore to realize its assets and discharge its liabilities and commitments in other than normal course of business and at amounts different from those in the accompanying audited consolidated financial statements. These adjustments could be material.
Transactions with Related Parties
All transactions with related parties have occurred in the normal course of operations at the exchange amount agreed between the parties. All amounts are unsecured, non-interest bearing and have no specific terms of settlement, unless otherwise noted. Related parties include members of the Board of Directors and key management personnel, as well as close family members and enterprises that are related to these individuals.
Transactions with Bevo Farms Ltd.
Bevo Farms Ltd. was a related party through the Chief Innovation Officer, who was also a director of the Company, resigned in November 2022 and hence Bevo Farms is no longer a related party as at December 31, 2022.
The following summary of transactions occurred during the reporting periods:
| Twleve months endedDecember 31, 2022$ | Twleve months endedDecember 31, 2021$ | |
|---|---|---|
| Short term leases | 55,062 | 71,561 |
| Lease payments | 386,985 | 313,800 |
| Office expenses | 44,102 | 93,213 |
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Accounts payable | 173,586 | 18,291 |
| Lease liabilities | 1,165,147 | 382,930 |
Key management compensation
Key management of the Company are members of the Board of Directors and officers of the Company. The Company paid and/or accrued the following compensation to key management during the reporting periods:
| Twelve months endedDecember 31, 2022$ | Twelve months endedDecember 31, 2021$ | |
|---|---|---|
| Wages and salaries | 1,340,911 | 1,596,583 |
| Consulting fees | 840,061 | 1,280,873 |
| Share-based compensation | 862,642 | 1,782,606 |
| Total | 3,043,614 | 4,660,062 |
Outstanding Share Data
The Company has authorized share capital consisting of: (i) an unlimited number of common shares without par value or special rights or restrictions attached; (ii) an unlimited number of Class A preferred shares without par value and with certain rights and restrictions attached; and (iii) an unlimited number of Class B preferred shares without par value and with certain rights and restrictions attached. As of May 2, 2023, the Company has no Class A preferred shares or Class B preferred shares issued and outstanding.
As at December 31, 2022, and May 2, 2023, the Company had the following number of common shares, options, and warrants outstanding:
| December 31, 2022 | May 2, 2023 | |
|---|---|---|
| Common shares issued and outstanding | 207,136,774 | 263,163,774 |
| Options | 8,432,000 | 15,676,202 |
| Warrants | 30,597,275 | 86,624,275 |
| Total fully diluted shares | 246,166,049 | 365,464,251 |
Off-Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company's financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Contingent Liability
The Company is party to a claim that arose in the ordinary course of business on November 21, 2021, asserting that the Company was in breach of a consulting agreement by failing to make required payments and by purporting to terminate the services of the plaintiff, contrary to the terms that were agreed. Pleadings have closed and the Company's legal counsel is awaiting the date for discovery. As at December 31, 2022, the potential exposure the Company faces cannot be measured reliably, and the claim is not expected to have a material effect on the Consolidated Financial Statements.
The Company is also party to a claim that arose in the ordinary course of business in May 2022, asserting that the Company was in breach of certain obligations pursuant to a manufacturing agreement. In June 2022, the Company's legal counsel submitted a response to the notice of civil claim and a counterclaim against the firm and its directors in their personal capacity. As of the period end, the potential exposure the Company faces cannot be measured reliably.
The Company is party to a claim that arose in the ordinary course of business in August 2022, asserting that the Company was in breach of certain obligations pursuant to a purchase agreement. The Company's legal counsel has submitted a response to the notice of civil claim and awaits a response from the plaintiff. As of the period end, the potential exposure the Company faces cannot be measured reliably.
Financial Instruments
The Company classifies its fair value measurements with the following fair value hierarchy:
Level 1 - Unadjusted quoted prices at the measurement date for identical assets or liabilities in active market.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The carrying value of the Company's cash & cash equivalents, trade and other receivables and trade and other payables approximate fair value due to their immediate and short-term nature.
The fair value of the Company's loans payable is the sum of expected future cash flows discounted at the market interest rate.
The earnout payable is measured at fair value based on unobservable inputs and is considered a Level 3 financial instrument. The determination of the fair value is primarily driven by the Company's expectations of HydroGreen achieving certain revenue targets. The expected related cash flows were discounted to derive the fair value of the earnout payable. As at December 31, 2022, the discount rate was estimated to be 31% (December 31, 2021 – 17%).
There has been no change between levels during the year.
The fair values of the Company's financial instruments are outlined below:
| As at December 31, 2022 | ||||
|---|---|---|---|---|
| FVTPL | Amortized Cost | Fair Value | ||
| Asset (Liability) | Level 2 | Level 3 | ||
| Cash | - | 2,944,924 | - | - |
| Trade and other receivables | - | 1,986,579 | - | - |
| Trade and other payables | - | (7,514,621) | - | - |
| Earnout payable | (1,386,396) | - | - | (1,386,396) |
| Loans payable | - | (10,707,631) | (11,687,978) | - |
| As at December 31, 2021 | ||||
|---|---|---|---|---|
| FVTPL | Amortized Cost | Fair Value | ||
| Asset (Liability) | Level 2 | Level 3 | ||
| Cash | - | 21,381,366 | - | - |
| Trade and other receivables | - | 2,126,752 | - | - |
| Trade and other payables | - | (4,529,514) | - | - |
| Earnout payable | (1,762,812) | - | - | (1,762,812) |
| Loans payable | - | (2,156,711) | (2,126,980) | - |
The continuity for earn out payable is as follows:
| December 31, 2022 | December 31, 2021 | ||
|---|---|---|---|
| $ | $ | ||
| Balance – beginning of period | 1,762,812 | 1,643,033 | |
| Less: payment | (325,104) | - | |
| Foreign exchange | 93,090 | 1,466 | |
| Fair value change during the year | (144,402) | 118,313 | |
| Balance – end of period | 1,386,396 | 1,762,812 | |
| Current portion | 1,386,396 | 1,762,812 | |
| Non-current portion | - | - |
The Company is exposed to certain risks relating to its financial instruments. The Company does not use derivative financial instruments to manage these risk exposures. As at December 31, 2022, the primary risks were as follows:
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge any obligations. The Company's cash and cash equivalents and receivables are exposed to credit risk. The Company reduces its credit risk on cash and cash equivalents by placing these instruments with institutions of high credit worthiness and the loans and advances will be secured by the assets of the Company which mitigates the credit risk. The Company provides allowances for potentially uncollectible accounts receivables from customers and receivables from associates. As at December 31, 2022, three customers accounted for 40%, 27% and 11% of gross trade accounts receivable, respectively (December 31, 2021 - 48%, 27% and 12%).
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities. Management and the Board of Directors are actively involved in the review, planning and approval of significant expenditures and commitments. Accounts payable and accrued liabilities generally have contractual maturities of less than 30 days and are subject to normal trade terms. Management is continuing efforts to increase sales and attract additional equity and capital investors to continue research and development activities, while implementing effective cost control measures to maintain adequate levels of working capital.
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company's (loss) income or the fair value of its financial instruments. The market risk is analyzed further below:
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not hold any financial liabilities with variable interest rates. The Company does maintain bank accounts which earn interest at variable rates, but it does not believe it is currently subject to any significant interest rate risk.
Foreign currency risk
The Company operates principally in Canada, United States and China, and is therefore exposed to foreign exchange risk arising from transactions denominated in foreign currencies. Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the Company's functional currency.
The Company's cash and cash equivalents, accounts receivable, marketable securities, non-current assets, accounts payable and accrued liabilities and other current and non-current liabilities are denominated in several currencies and are therefore subject to fluctuation against the Canadian dollar.
The table below summarizes the Company's exposure to the various currencies denominated in the foreign currency as at December 31, 2022, and 2021, as listed below:
| December 31, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| US dollar Chinese renminbi | US dollar Chinese renminbi | |||
| $ | ¥ | $ | ¥ | |
| Cash | 500,276 | 8,627,405 | 166,656 | 1,601,433 |
| Trade and other receivables | 825,032 | - | 1,129,064 | - |
| Trade and other payables | (2,866,745) | (11,739) | (1,039,306) | (63,669) |
| Customer deposits | (4,346,496) | (15,759,855) | (661,602) | - |
| Earn-out payable | (1,021,775) | - | (1,385,363) | - |
| Loans payable | (77,402) | - | (84,736) | - |
| Net exposure | (6,987,110) | (7,144,189) | (1,875,287) | 1,537,764 |
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company has not made any special arrangements to reduce the related currency risk.
Based on the balances as at December 31, 2022, a 1% increase or decrease in the value of the Canadian dollar exchange rate against all of the other currencies on that date would result in an increase or decrease of approximately $108,846 (December 31, 2021 – $20,707) in earnings (losses) before taxes.
Critical Accounting Estimates
The preparation of the Company's condensed consolidated financial statements in conformity with IFRS requires management to make judgements, estimates, and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects current and future periods.
In the process of applying the Company's accounting policies, management has made the following estimates, assumptions, and judgments, which have the most significant effect on the amounts recognized in the Consolidated Financial Statements:
Going concern: Determining if the Company has the ability to continue as a going concern is dependent on its ability to secure debt and equity financing and to achieve profitable operations. Certain judgments are made when determining if and when the Company will secure debt and equity financing and achieve profitable operations.
Useful lives and impairment of property, plant, and equipment: Depreciation of property, plant and equipment is dependent upon estimates of useful lives and residual values which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.
Impairment of goodwill and intangible assets: Goodwill is tested for impairment annually, or whenever there is an indication that the CGU may be impaired, by comparing the carrying amount of the CGU, including the goodwill, with the recoverable amount of the CGU. If the carrying amount of the CGU exceeds the recoverable amount of the CGU, an impairment loss is recognized in profit or loss.
Fair value of financial instruments: When the fair values of financial assets and financial liabilities recorded in the Consolidated Statements of Financial Position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques such as the discounted cash flow (DCF) model. The inputs to these models, such as discount rates and future cash flows, require a degree of judgment. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments.
Provision for expected credit losses: The valuation of allowances for uncollectable trade receivables requires assumptions including estimated credit losses based on the Company's knowledge of the financial conditions of its customers, historical experience, and general economic conditions. At each reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed. The assessment of the correlation between historical observed default rates, forecast economic conditions and expected credit losses is a significant estimate. The Company's historical credit loss experience and forecast of economic conditions may also not be representative of customer's actual default in the future.
Warranty provision: Provisions are made for estimated warranty claims in respect of equipment, spare parts, and service supplied to customers which are still under standard warranty at the end of the reporting period.
Convertible debentures: The allocation of the proceeds from the issuance of compound instruments between the financial liability and equity component requires management to use estimates and judgement. In determining the fair value of the financial liability component, the Company estimates the prevailing market interest rate for an equivalent nonconvertible instrument.
Senior term loan: The allocation of the proceeds from the issuance of loan between the financial liability and warrants issued requires management to use estimates and judgement. In determining the fair value of the financial liability component, the Company estimates the prevailing market interest rate for an equivalent financial instrument.
Disclosure Controls and Internal Controls over Financial Reporting
The Company takes all necessary steps to ensure that material information regarding the Company's reports filed or submitted under securities legislation fairly presents the financial information of the Company. Responsibility for this resides with management, including the Chief Executive Officer and the Chief Financial Officer. Management is responsible for establishing, maintaining, and evaluating disclosure controls and procedures as well as internal control over financial reporting. In the fiscal year 2022, the Company employed an external consultant to evaluate the disclosure controls and internal controls over financial reporting.
The evaluation of the effectiveness of the Company's disclosure controls and procedures ("DC&P"), as defined in National Instrument 52-109 Certification of Disclosures in Issuers' Annual and Interim Filings, was performed under the supervision of the Chief Executive Officer and the Chief Financial Officer. Management has also designed the Company's internal control over financial reporting ("ICFR") to provide reasonable assurance that the Company's financial reporting is reliable and that the Company's consolidated financial statements were prepared in accordance with IFRS. The design and effectiveness of ICFR was evaluated as defined in National Instrument 52- 109 under the supervision of the Chief Executive Officer and the Chief Financial Officer. The design of ICFR is undertaken in accordance with the 2013 COSO framework.
Based on an evaluation completed by the management, it was concluded that certain weaknesses existed as of December 31, 2022, as described below, and due to these material weaknesses, the design and operational effectiveness of the Company's DC&IP and ICFR were not effective as of December 31, 2022.
Management Review Controls: Due to the significant downsizing in the Company's headcount as a result of its cost reduction measures implemented in 2022, the Company did not consistently have documented evidence of management review controls and did not always maintain segregation of duties between preparing and reviewing analyses and reconciliations with respect to certain processes.
With oversight from the Company's Audit Committee and assistance from a third-party service provider as necessary, management will continue to implement remediation measures related to the identified material weaknesses, including but not limited to the following:
- x Review key business processes and controls to determine where further system reliance can improve segregation of duties, and reduce on manual management review controls;
- x Improve control tools and templates to assist in the sufficient and consistent documentation of review controls and procedures; and
- x Provide training to management and control owners on key control attributes and documentation requirements.
For the twelve months ended December 31, 2022, there were no material changes in the Company's internal controls over financial reporting or changes to disclosure controls and procedures that materially affect, or would be reasonably likely to affect, the Company's internal control systems.
Additional Information & Approval
Additional information relating to the Company is on SEDAR at www.sedar.com.
The Board of Directors has approved the disclosures contained in this MD&A as of May 2, 2023.